Commodity ‘speculators’ targeted in EU-wide securities reform

Europe-wide curbs on commodity “speculators”, more light on the bond markets, and reinforced controls on ultra-fast trading were proposed by European Union regulators on Monday (28 September).

The European Securities and Markets Authority (ESMA) unveiled its batch of 28 final rules to flesh out the Markets in Financial Instruments Directive II (MiFID II) law due to come into force in January 2017.

MiFID II is the biggest overhaul of the bloc’s securities rules in a decade to apply lessons from the 2007-09 financial crisis and advances in computerised trading technology.

The current rules focus mainly on share trading but the revisions will bring bonds and commodities under the net and move swathes of off-exchange trading onto electronic platforms to increase transparency for investors and regulators.

ESMA Chairman Steven Maijoor said the rules will change the way Europe’s secondary markets function. “The magnitude of this change should not be underestimated,” he said in a statement.

Bankers balk at too much transparency

The new rules for bonds were hotly contested by banks and asset managers, with Britain’s Investment Association trade body calling for a delay.

It warned that increasing transparency in bond markets in the wrong way, especially before a trade takes place, would harm already uncertain liquidity at a time when the EU wants capital markets to raise more funds for economic growth.

Regulators will determine whether there is enough trading in a bond for it to be subject to the new transparency rules. ESMA has decided on a bond-by-bond calculation method, rather than looking at the bond sector overall. Some 2,000 bonds will be affected, mostly government debt, ESMA said.

Position limits, which curb how much of a commodity individual trading firms can hold in order to avoid unduly influencing its price, are being introduced for the first time. They were called for by policymakers to stop “speculators” after food prices hit record highs in recent years.

ESMA said it has scaled back the threshold for deciding when a limit has been breached. Depending on the commodity, the threshold ranges from 5 to 35% of the market, scaled back from 10 to 40%, after criticisms from the sector.

‘Dark pool‘

In addition MiFID II will cap how much trading in a stock can be done in a “dark pool” or anonymously and ESMA said the final rules make no major change to what it previously proposed.

High-frequency trading (HFT), which uses ultra-fast computers to place trades, will also be directly regulated, having been blamed by critics for accentuating volatility.

ESMA’s recommended rules will need endorsement from the bloc’s executive European Commission to come into force in January 2017.

“I would expect limited changes, if at all, to these standards,” ESMA Chairman Steven Maijoor told a conference call.

Background

In October 2012, MEPs approved a ban on excessively fast trading. The Parliament voted by 495 to 15 in favour of MiFID II, a draft law that updates EU securities rules to reflect lessons from the financial crisis and rapid advances in trading technology.

Lawmakers in the European Parliament had intended to tighten regulations on so-called high-frequency trading (HFT), which uses computers to dart in and out of markets in milliseconds and exploit tiny price differences, because they fear it makes markets more volatile.

They are also want to cracking down on speculation in commodities markets in a bid to reduce big price swings.

The rules include the introduction a synchronised clock for trading shares, bonds, commodities and other instruments across the EU so regulators can spot abuses more easily in a market where many exchanges and platforms trade the same shares.

Share orders would have to remain in the market for at least 500 milliseconds, far longer than HFT traders stay at present.